7 Keys to a Sound Retirement Part 2 of 2

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Hello and welcome back for Part 2. In Part 1 we went over the first 2 Keys to a sound retirement as outlined by the Society of Actuaries (SOA). In this second part will be taking a look at the remaining five and, without further ado, let’s get started. Enjoy.

The 3rd Key to a sound retirement, at least as far as the SOA is concerned, is the need to compare your expenditure needs against your anticipated income. Will the fact is, will retirement is just as filled with expenses as any other part of your life. Expenses during retirement are basically the minimum that you need to sustain your standard of living plus a bit extra for any needs that are nonrecurring and any money needed to help meet a person’s dreams. Also, these needs are definitely going to change as a person gets older.

What the SOA advises is that, in order to make your retirement finances in reality, a person first needs to take a look at them on paper and make sure that they work out. When doing this, a person needs to take a look at whether their guaranteed income will be enough to cover any essential living expenses such as housing, insurance premiums and food. Once these numbers are figured the amount needed for discretionary expenses like travel should also be looked at.

Guaranteed sources of income include Social Security (hopefully), pensions and annuities. Under the heading of ‘not exactly guaranteed’ there are any earnings that you have from work, any income that you may have from assets like capital gains, rental properties, interest and dividends.

What most people find is that, while they are going about the process of figuring out their income and expenses, they find that they are forced to revise their discretionary expenses. This happens in many cases when there are fewer guaranteed sources of income to meet the initial, and more important, essential expenses.

The 4th Key is to compare the amount of money you’re going to need in retirement against your total assets. This simply means calculating the income and expenses that you’re going to have once you reach retirement and figuring out if what you have is going to indeed last you as long as you need. In simple terms, what you need to do is calculate the net present value of all of your expenses.

This is easier said than done, especially when you consider the many factors, like the date of your retirement, inflation rates and after-tax investment returns, that can and will change during your retirement.

Once you’re done crunching the numbers, if you find that the present value of your expenses is more than the present value of any assets that you have, you’re obviously going to need to make some adjustments

Key 5 is to categorize your assets. What the SOA recommends is that you grew up your assets into the three phases of retirement including early, mid-and late. The assets that you put into the early category should, for the most part, be liquid. Mid and late-retirement assets would include intermediate term investments, TIPS, balanced investment portfolios, variable annuities, and laddered fixed interest deferred annuities.

The 6th Key is not entirely surprising, relating your investments to your investing capabilities and your portfolio size. Basically what the SOA recommends (and what we’ve been recommending all along) is that a person only invest in suitable investment opportunities that are relative to their risk tolerance, their investment knowledge and also the capacity of their portfolio to accommodate investments that are relatively volatile. “In short, a retiree should not invest beyond his investment skills, including those of his adviser,” the SOA report stated.

Finally there’s the 7th Key, keeping your plan current. This is rather straightforward advice that says that retirement income plans can and should be evaluated and changed on a regular basis. Some of the things that the SOA refers to as far as ‘changes’ are a person’s health status, their life expectancy, their investment returns and of course inflation. Employment status may also change as well as a person’s expected and actual date of retirement. The death of a loved one is a change that they noted as well as divorce and the possibility of no longer being independent.

Basically, they recommend that a person take a look at their retirement planning on a yearly basis and, the closer that a person is to retirement, the more attention they give said plans.

What we’d like to note, for the record, is that the vast majority of the advice that the Society of Actuaries gives in their report is exactly the same advice that we’ve been giving to our readers here on our blog for many months. We hope you enjoyed this 2 Part blog and that, at the very least, it was informative and interesting. Please make sure to bookmark our website and come back to visit often as we have new financial blog articles on a very regular basis. See you then.